The past is no indication of the future. Just because you spent $97.21 on gas last month, doesn’t mean you are going to spend the same amount next month.

Expenses vary widely each month (excluding fixed bills like housing, cell phone, or car payment). A plane ticket eats up your cash one month, while gifts or a new outfit may eat up your dollars the next.

Most non-fixed expenses are hard to predict, and thus are hard to budget for.

We all know budgeting is smart. But for years I struggled with it. I spent hours pushing paper and writing down what I spent, trying to make the income number bigger than the outgo number. I used a fancy excel spread sheet that a financial planner gave me that automatically summed built-in categories. It even had a plan of attack for “irregular expenses” that had me chasing after all the one-time expenses from the past year and dividing them by 12 and depositing that much each month into a special account. At first, I was so thrilled with this system I pushed it on others.

But it, too, failed.

The spread sheet was extremely good at helping me figure out where my dollars went. But it made no attempt to keep my spending in check. And it couldn’t predict what I needed to save money for – airfare? wedding gifts? bicycle repairs?

When I left my steady job to launch BargainBabe.com I had to do something. Namely, figure out if Hubby and I could survive on one salary. We weren’t going to have enough regular income to cover our past spending habits, so I focused on absolute necessities and bills we were going to have to pay no matter what. This included:

rent

gas and electricity

Internet and cell phone service

gasoline (two full tanks only)

doctor visits

medicine

savings to max out our 401(k)s and IRAs

I subtracted these necessities from our income.

Then I made a second group of expenses for all the irregular items that come up, including car insurance, car registration, car repairs, dental visits, Christmas presents, magazine subscriptions, charitable donations, vacations, yoga passes, and oil changes. I looked at what we spent on these categories last year and estimated how they would change in the coming year, then I divided by 12. (Okay, looking backward is occasionally necessary – and useful).

I set up an automatic withdrawal from checking to a special ING savings account to cover our irregular expenses when they come up.

After subtracting the absolute necessities and irregular expenses from our take home income, I’m left with our discretionary income. This number is very important because it represents the actual dollars we have to spend each month. All my other dollars are spoken for.

Discretionary dollars go toward:

groceries

clothing

bus fare

extra gas

movie tickets/entertainment

vitamins

toiletries

meals out

hair cuts

travel

home maintenance

gardening supplies

and everything else!

Once you figure out your discretionary income you are nearly done. The last step is to grab an index card and put this number at the top. Each time you spend, subtract it from the total. In lieu of an index card, use on your mobile Internet device.

This way you know exactly how much money you have left each month and do not spend more than you earn. The first month I tried this forward looking budget, my credit card bill dropped by more than $2,000. Hallelujah!

This system is also MUCH less time consuming because once you calculate your discretionary income, you only have to write down each purchase. And that makes it easy to say no or wait for a better price!

Comments

Wow I love this idea. I will definitely try it. Right now we’re trying to budget with my husband’s income (which can vary) and my unemployment. This seems like a much easier plan than figuring out a set amount for things like gas. Because how do I know how far I’m going to drive each month. Unexpected things come up!

Julia, this is so helpful…we are cruising in the same financial boat, but I have NEVER seen budgeting done this way, and I just had a major A-HA moment…
Can’t wait try this out! Thanks Julia, awesome blog…

I’ve tried the forward-looking budget thing with the YNAB (you need a budget) software, but I found it the same as every other budget software in that entering data is tedious and boring. If it’s boring, I’m less likely to do it and more likely to forget (which means next time I remember, I have even more boring data entry to do). The index card is a great idea! Another handy way would be a PocketMod. I <3 my PocketMod, but I never thought about using it for budgeting until recently.

I completely agree with this method. This is the method that my wife and I use and it is working out very well for us so far. To not be tedious we re-evaluate and remake our spreadsheet only once every 6 months, having only to make minor changes to it in between.

I find it almost ridiculous that groceries don’t rate as “absolute necessities and bills” – what, you survive on air? Yes, you have discretion in how much you spend, but unless you’re on military deployment with mess privileges 7 days per week, this basic amount for this category must be included in your necessities budget – even if it’s at a fixed modest amount. Your index card is a modified/simplified envelope system – just bucketing all ‘discretionary’ costs into one category. It’s a good basic idea, but a real benefit of budgeting is behavior modification – analyze what you spend and perhaps find control points and leaks – if you don’t go back to that card and review where you’ve spent your money, you’re not in a position to forward project effectively the ‘minimum’ discretionary amounts for future periods, especially if you consider groceries to be discretionary. Just my opinion…

Michelle, you bring up a good point. I have to eat something! I never spend the same amount on groceries, however, because one month I may be traveling and make fewer trips to the grocery store, or another month I may have a big party and spend extra on groceries. If I budget a fixed amount I’ll underspend or overspend. Tracking those fluctuations is less productive for me than including food in my discretionary spending. This way, I’m really motivated to get the best deals at the grocery store because the more I save the more I have to spend on other items.

As for behavior modification, the behavior I am trying to modify is spending more than I have! By setting up a system that allows me to clearly track the dollars that are NOT accounted for each month, I can easily achieve that goal. I don’t care to set minimums for every category because outside my absolute necessities and fixed fills, my expenses vary wildly each month.

I appreciate your suggestions and will keep them in mind. Budgeting is very personal and it sounds like you have a slightly different system. If it works for you, stick to it!

One thing I did recently was to separate out my food-family budget from my food-entertaining budget…DH has a very bad habit for our budget, but it’s his personality, so I made my bed there: he is the most social person I’ve ever met! He invites people over for spontaneous dinner parties/barbeques all the time! Probably twice a week we host from 1 to 7 extra…and you can imagine, my baseline grocery budget is set on our 3 person household. So anytime we bbq chicken for a crowd, the price of that entertainment comes out of DH’s fun money and back into the grocery budget. I hate to be a harda$$ about it, but DH has no concept of what it takes to provide food/beverage for these events…Anyway, tracking categories (or not) is definitely a personal [email protected]

Michelle, sounds like you have a great system for throwing parties. Do you ever ask guests to bring a dish or chip in? I find friends usually ask what they can bring and are happy to buy chips, meat, beer, etc. Pot-lucking makes a difference!

Potluck is definitely the norm – and most folks do ask what they can bring, which cuts the cost a LOT, but even just the meat/main dish and the paper products (napkins, plates, etc) were killing my food/household supplies budget. Plus DH has NO problem increasing the guest list with a few phone calls – usually to his bachelor friends who aren’t as potluck-savvy as our couple friends…Dh’s gotten better about asking them to bring ice or paper plates/etc, but he’s still got a learning curve (which I hope the new budgeting plan will help). He’s the extravert-spender in our home…We are trying to get out of debt, but at the same time, there are things we don’t give up – like enjoying our friends and apparently, backyard parties!